WSJ article from 3/25/99 on China wanting to join WTO
March 25, 1999
China, in About-Face, Proposes
Reforms in Effort to Join WTO
By IAN JOHNSON and LESLIE CHANG
Staff Reporters of THE WALL STREET JOURNAL
China has promised the most wide-ranging package of economic reforms in its
13-year effort to join the World Trade Organization.
In meetings with trade negotiators over the past two weeks, China has
proposed opening formerly closed industries, including telecommunications,
insurance and banking, according to people close to the talks. It has also
promised to lift an informal "buy local" order given to several ministries and to
allow foreign companies to import and distribute more foreign products.
Agricultural tariffs are also due to be lowered, import quotas expanded and
bans on some products -- notably U.S. citrus fruit and wheat -- partially lifted.
Officials caution that the promised reforms are far from being done deals. One
hurdle is time: Although China must also reach agreement with other trading
partners, U.S. and Chinese negotiators want to strike at least a preliminary deal
before Chinese Premier Zhu Rongji goes to Washington on April 8. If there is
no deal in time for Mr. Zhu to make a triumphant U.S. tour, some negotiators
fear, China may lose interest. Another obstacle is that a deal the countries'
leaders strike must be ratified by their legislatures, an especially dicey proposal
in Washington, where an angry Congress may kill any deal struck with a
country that is increasingly seen as hostile to the U.S. And sticking points
remain, among them Chinese protectionism in an agricultural sector that still
employs close to 900 million of this country's 1.2 billion people.
An About-Face
But China's proposals represent an about-face from just a few months ago,
when talks were stalemated and China seemed years away from joining the
WTO, the body that devises world trading rules. "Things are moving ahead
much more dramatically than at any time in the past," says a Western diplomat
based in Beijing. "If this goes through, the change in the business environment
here in half a dozen years would be significant." Most of the proposed changes
would be phased in by 2005, giving Chinese companies a chance to become
competitive.
The reforms would be welcome news for foreign companies in China, which
have complained about increasing protectionism and slender profits. After an
initial rush of euphoria earlier this decade, when China's economy seemed
destined to open quickly and grow at double-digit rates, some foreign
companies are leaving China and others are scaling back operations.
Some of the most significant changes involve telecommunications, an industry
long closed to most foreign investment. Over the past two years, Beijing's
bureaucrats have ordered power and telecom companies to buy local products
and threatened to close down foreign joint ventures in telephone operating
companies. According to negotiators, China has now proposed lifting its ban on
foreign investment in telephone companies. Foreigners would be allowed a 35%
stake in phone companies, although U.S. negotiators are still pushing for 51%.
In the past, some companies like Sprint Corp. evaded the ban on foreign
investment by setting up complicated joint ventures that allowed them effective
control, a gray-area investment that was technically illegal but tolerated by
investment-hungry officials. China proposes that such deals wouldn't be
allowed in the future but that existing ventures would be protected, although
foreign companies would probably have to reduce their stakes to 35%. Mr. Zhu
has also told Western negotiators that "buy local" orders have been rescinded
and that China will adhere to the International Telecom Agreement by 2005,
which calls for ending import tariffs on telecom equipment.
Cellular-Phone Standards
China has also recently pushed forward with CDMA, a U.S. cellular-phone
standard it had previously restricted but which could be worth billions of
dollars in sales to foreign -- especially U.S. -- companies. Already,
foreign-equipment manufacturers in Beijing say they have started to receive
orders for CDMA equipment, which is made by Lucent Technologies Inc.,
Motorola Inc. and Qualcomm Inc. of the U.S., Samsung and Hyundai of
South Korea, and Matsushita of Japan. Most Chinese mobile-phone users rely
on a European-devised standard, GSM, but the country now plans to increase
the number of CDMA users to 40 million by 2005 from about 800,000
currently, says Jay Hu with the U.S. Information Technology Office in Beijing.
Although not directly tied to the WTO, which usually deals in overarching
principles rather than specific trade spats, the CDMA issue highlights China's
determination to end its telecom monopoly. CDMA will be offered by China
Unicom, a small company that was supposed to challenge the state monopoly,
China Telecom, but which has been too heavily restricted to mount a serious
threat. Now, China says it may divide China Telecom into four companies.
That, combined with a decision to allow Unicom to offer CDMA technology,
signals that the government wants to break up China Telecom's monopoly.
The proposed reforms also promise a dramatic change in financial services. In
the past, Beijing has doled out banking and insurance licenses piecemeal, often
giving a license to a company in order to cement ties with its home country.
Those licenses also severely limit the type of business to be done. Foreign
banks that currently hold a local-currency license, for example, are restricted to
taking loans and deposits from joint-ventures or foreign firms, leaving off-limits
the much larger base of Chinese companies and individuals. Insurance
companies, meanwhile, are restricted to doing business in the single city of
Shanghai.
The new rules would open up wider chunks of the Chinese market, but with a
catch: As the market opens to them, foreign companies would have to take
Chinese partners. Foreign banks would be permitted to take up to 50% equity
stakes in joint-venture banks that would be allowed to offer full-service retail
banking. Insurance companies likewise, would be able to offer nationwide
service in 50-50 joint ventures with Chinese counterparts.
Concerns Over Vagueness
While foreign investors applaud the new measures, they warn that the promises
are vague enough to be hewed down later. For example, insurance company
executives worry that they might be required to apply for licenses for each
additional city, considerably slowing expansion plans. Executives also complain
about being slowed down through forced marriages to Chinese partners. "In
terms of Chinese partners, there's not a lot of pickings out there," says one
U.S. insurance executive.
Overall, though, the improved climate is starting to bear fruit in some sectors
of the economy. For example, China has begun relaxing restrictions on grain
import quotas, once tightly held by a handful of state trading firms. "The
government is now giving [import and export] licenses to private companies,"
says Phil Laney, China director for the American Soybean Association in
Beijing. "They're finally saying they are going to let the state trading system
break down."
Longer term, officials and business executives say, a deal could radically
change China's business environment. Says a Beijing-based diplomat: "To put it
simply, China is going to be a more normal country for foreign business."
-- Josh Cherin of Dow Jones Newswires contributed to this article.
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